Joel Kwan is a corporate lawyer based in Los Angeles, California. Currently acting as financial/legal associate for Westwood Group, a specialty finance company, Joel focuses on general regulatory compliance, creditor rights and structured finance. Visit his website joelkwan.ca to learn more.

Monday, December 9, 2013

Comparing NAFTA and CETA

On October 18 2013 the European Union and Canada reached an
agreement in principle concerning the Comprehensive Economic and Trade
Agreement (CETA). The Canadian
government has yet to release the text of the agreement, but has released a
technical summary upon which this commentary is based.

CETA is seen as the most ambitious and far-reaching
agreement since the North American Free Trade Agreement (NAFTA) between Canada,
US and Mexico. NAFTA has been implemented
for nearly 20 years so there is much written about its after-effects.

Here is how NAFTA matches up to CETA.

Trade in Goods

A central component of a free trade area (FTA) is the
reduction of trade barriers between countries.
Trade barriers can be in the form of quotas, tariffs or non-trade
barriers (could be technical standards used as barriers).

While NAFTA planned for a phasing out of most barriers in a
15 year time frame, CETA sets this phasing out period at seven years for the
most sensitive goods. To have an
indication of the speed of the phasing out, over 95% of all goods are to face
no tariffs upon entry into force of CETA.
With NAFTA, the process was much slower and haphazard. For example, only
40% of goods faced tariffs of 0% between Mexico and the US when NAFTA came into
force. Further, piece-meal deals between
the three countries had to be reached in order to further lessen trade
barriers. CETA on the other hand is more
comprehensive and tends to treat the EU as one economic entity (as it should)
which eliminates the need for side deals.

CETA also seems to have an upper hand in terms of reducing
barriers for agricultural goods, normally an issue of great contention between
trade partners. In fact, World Trade
Organization trade talks between member countries have been constantly failing
in large part due to failure to arrive at a compromise on agricultural
goods. CETA is set to have most
agricultural goods trade freely between the EU and Canada within seven years. NAFTA was not as successful on this count
since the tripartite side deals concerned sensitive agricultural goods.

One interesting aspect of CETA are the rules of origins that
favour the use of foreign components.
Rules of origins are used to determine the country of origin of the
traded goods. If a good is deemed to be
produced outside the FTA, then tariffs may be levied. Without getting in the nuts and bolts of
rules of origin, suffice it to say that CETA would allow auto components that
only have 45% Canadian content to count as a good produced in Canada. In contrast, NAFTA required a domestic
content of 62.5% at entry into force.
Auto manufacturers would claim that this will erode domestic business
and jobs while third-party foreign manufacturers could see this as an indirect
way of benefiting from CETA.

One important distinction between NAFTA and CETA is the FTA
between Canada and US that existed before NAFTA. Many observers note that Mexico felt the
greatest economic effects from the agreement since Canada and US had already
extensively reduced trade barriers before NAFTA. This is not the case with CETA. Currently, Canada and the European Free Trade
Association (Iceland, Liechtenstein,
Norway and Switzerland) have an agreement to reduce the tariffs on goods. This represents only a fraction of the EU
economically and much less comprehensive than a FTA. Consequently, there are chances that the
economic effects of CETA be felt more rapidly and be more important than with
NAFTA.

Another important difference is the economic climate of
Canada. When NAFTA came into force,
Canada’s manufacturing industry was much more powerful. Today, the manufacturing sector is sluggish
due to a Canadian dollar hovering at parity with the American dollar and NAFTA
which lifted the protectionist shield of uncompetitive manufacturers. Also, Canada’s resource-based economy is
stronger now than 20 years ago. As a
result, there is fear that Canada will be exporting natural resources to the EU
and in return, high-value finished goods will be imported. Critics of CETA warn that this could lead to
a growing trade deficit.

Trade in Services

This area of CETA is much less ambitious. Compared to NAFTA, there is no surprise here with
the standard Most Favored Nation provisions and specific exclusions.

Labour Mobility

While CETA boasts a framework that streamlines regulations
to allow mobility of professions between member countries, this is merely a
voluntary endeavor left at the discretion of the respective governing
bodies. It is unclear how this
initiative will boost mutual recognition of qualifications. NAFTA was slow on this issue, but as of 2008,
the three countries had agreed on the core competences of 64 professions in
order to issue NAFTA visas that allow workers to work temporarily in a member
country for up to three years. There
has already been some initiatives between Canada and the EU prior to CETA with lawyers and architects.

Trade in Investments

Of interest here is a commitment in CETA to provide a
dispute-resolution mechanism that is transparent and in which interested third-parties
can part-take in. This diverges greatly
from NAFTA chapter 20 which provides for a closed dispute settlement mechanism
for foreign investors.

Intellectual Property
Protection

NAFTA based its IP regime on the then TRIPS negotiations. Canada nonetheless has continued to be viewed
as weak in terms of IP protection. CETA contains nothing ground breaking in
terms of Copyrights and Trademarks, but there is a commitment to allow
pharmaceutical companies to restore up to two years of patent protections that
was lost by regulatory processes and also allow innovative pharmaceuticals (as
opposed to generic) to have a right of appeal for decisions made under the
Patented Medicines Regulations, a right that was only available to generic
pharmaceutical companies. This change is
welcomed and had been long awaited by pharmaceutical companies.

The final text of the agreement is set to be agreed upon in
2015. There will be a ratification and
implementation phase afterwards.
Therefore, it might be some time before the agreement comes into force. Compared to the NAFTA experience, the
economic effects of CETA on Canada should be expected to be greater since most
of the trade integration had been accomplished between US and Canada prior to
the tripartite agreement. One finding
from the NAFTA experience that was negative for Mexico was that the benefits
did not help narrow the gap between the rich and the poor. For CETA, it will be important to enforce complementary
policies on poverty reduction in the hopes that any gains from trade will be equitably
distributed, especially given that the EU is composed of 28 member states that
vary greatly in terms of economic development.